Harry Hamburg – Exponential Investor (United Kingdom) –
Thank you for your questions on investing in crypto.
Most of the questions I got revolved around how to get in, how to buy smaller cryptos, how to transfer and store your cryptos safely and how to cash out.
That’s great because I’ll be covering all of that in this guide. I can’t cover everything today or it would be a very long article. But I will cover all of these topics, in detail, over the coming weeks.
Here’s an outline of what I’ll cover in this guide:
- How to evaluate the space
- How to set up your portfolio
- A rundown of the different types of crypto
- How to buy and store crypto
- How to trade crypto on exchanges
- How to cash out your crypto
- Possible tax implications of trading crypto
- Useful resources
Big institutional money coming to cryptos in 2018
The reason I was away this week is I was attending London Blockchain Week with Sam Volkering.
We saw some really interesting presentations and got some good information on upcoming developments within the crypto space. On Monday I’ll cover the biggest stories that came out of the event.
But for now I’d just like to quote Obi Nwosu, CEO and founder of Coinfloor. He was on a panel at the event and was asked about institutional investors’ interest in cryptos.
He stated, “This is only the tip of the tip of the iceberg.”
He predicted that in six to 12 months we will see physically delivered bitcoin futures and this will lead to a flood of institutional money into the market.
And if anyone should know, it’s Obi Nwosu. Coinfloor is the UK’s longest running and most liquid bitcoin exchange. It mostly services big money traders and institutions.
So if you’re scared you might have missed the boat already, think again. If Nwosu is right, 2018 will be a huge year for cryptos.
Before we begin
In this guide, I’m not going to try hype you about why crypto will change the world and how it’s minting new millionaires every day. That is now common knowledge.
We are living through a revolution in money.
But if you are reading this guide, you already know the potential. You already know how much money people are making, and you hopefully already know the huge risks involved with this level of reward.
For a quick summary of what makes bitcoin and other cryptos so world-changing, you can read the first half of my article about DAG cryptos here. In it I explain why the idea of blockchain is so important and what it means for our lives.
So, with that in mind, let’s get started.
The number one rule of all crypto investing
Can you guess? I think you can probably guess…
Never invest more money than you can afford to lose.
You hear that phrase all the time, right? I say it in almost every essay I write on cryptos. So maybe you just gloss over it by now.
But please don’t. It’s not even really about your tolerance to risk or even about how much you could lose.
It’s about how much you could make.
Simply put: by putting in less money you have the potential to make a lot more.
Hmm, invest less money to make more money you say? Right. Oh-kay.
Make more by investing less
Crypto markets are not like traditional markets. Any given crypto can and does sometime rise 200% or more in a single day.
Cryptos can and do rise thousands of per cent in weeks. And we’re not just talking about the smaller ones. Even cryptos in the top 20 do this.
By the same token, even top 10 cryptos can drop by 50% or more in a single day. In a matter of hours, in fact. The whole market can. And it can and does stay low for months and months before recovering.
This is the nature of crypto.
If you only invest money you can afford to lose – literally money you could throw away and not be too sad about – you can ride these swings.
This is the only way to have a “strong hand” and not get spooked by market dips.
At least once a month, big voices in crypto call the end, or the bubble bursting. They are always proven wrong.
The market keeps on growing because it is changing the world. But it does not go up in a straight line.
If you invest too much, you will get spooked. You will pull your money out in the dips and crashes and you will lose money.
A common meme in crypto circles is “buy high, sell low”. That’s because so many people fall for the fear, uncertainty and doubt (FUD) that comes with the crashes.
Time and time again these “weak hands” lose money. And they are the very people who cannot afford to be losing money.
The strong hands stay in, ride out the crash and watch their cryptos go back up. They can only do this because they didn’t invest too much into it.
It’s kind of ironic that the people losing money are the people who can’t afford to and the people making money are the people who can do without. But that’s just the way it works.
You need to be okay with watching your portfolio drop in value by 50% overnight. Ideally, this would be the point you buy more.
In conclusion, markets will crash. You need to expect this. Keep your hands strong by investing less.
You need to be comfortable with the fact all of the money you invest could go to zero. You don’t get the highs without the lows. That’s just not how it works, unfortunately.
I lay out a good way to decide how and when to buy in at the end of my FOMO vs FUD article here if you want more information on that.
Now we have that base covered, let’s get to the fun question. What exactly should you be investing in?
How to structure your crypto portfolio
All cryptos are not created equal.
There are four main categories of cryptos. We could break each category down even more, but for now let’s just get to know the three main ones.
For reasons I’ll explain, you will probably want to structure your portfolio about 70% platform, 20% currency and 10% utility.
You, of course, are free to allocate your own money however you choose. But that’s probably a good baseline.
I only have time today to cover the platform cryptos. But this is good because they should be your starting point. Next week I’ll move on to currencies and utilities. And after that we’ll get into how to actually buy them.
I have broken up the guide in this way so that you have time to research what you’re getting into before making the jump.
This is key. Just as with investing less to make more, doing your own research will add to the strength of your hand.
You want to really know why you’re investing in a certain crypto before you actually do it or you will fall for the FUD and you will probably sell too early. Or even sell at a loss.
A word about specific cryptos
This guide is about how to invest, not what to invest in.
I will cover the areas and show you the biggest, most promising players in each area. But it is key that you do your own research (DYOR).
I’m not just going to shill the latest hype-coins, I’m going to provide you with the resources to research and invest for yourself. Teach someone to fish and all that.
The amazing thing about cryptos is you don’t need thousands set aside, you can start with very small amounts. And you don’t need big institutions and brokers to make your investments for you. You do it all yourself. This is a very “power to the people” monetary revolution.
And that’s the idea behind this guide. It’s giving you the resources to go out there and make money from cryptos for yourself, on your own terms.
However, I will list some of the main players (as I see them) in each category for a good starting point. More importantly, I’ll list their white papers, websites and communities, so you can research them for yourself.
Don’t just take my opinion on the best cryptos. At the end of the day, I’m just another random writer on the internet. DYOR. Always, always DYOR when it comes to cryptos.
Platform cryptos are what you want to have most of your holdings in.
The key to them being a platform is in their ability to utilise “smart contracts”. I’ve already written about how big of a development smart contracts here.
In short, they are called platforms because they are essentially a platform on which to build other cryptos and apps (or decentralised apps; Dapps, as they are known in crypto).
You can think of platform cryptos as being like land. If you own the land, you get a cut of whatever is built on it.
On any given plot of land a business can be built and fail, but the land is still worth money. And in time a better business will be built on that same plot of land and succeed. All the while, if you own the land, each business that comes along is giving you a cut.
You could make the tired analogy of “buying picks and shovels” here. But that is the most overused analogy in all of finance. And it still doesn’t really ring true. Even in the California gold rush (which is what that analogy refers to) most of the people selling those picks and shovels also owned a lot of the land.
Land is king. If you think about it, owning land is basically what makes someone a king or queen.
So, it stands to reason that the biggest platform cryptos make up about half of biggest cryptos by market cap.
The major players in this area are:
Ethereum – undisputed #1 in this space. “The world computer”.
Nem – like a user-friendly Ethereum. Faster, easier to use and big in Japan.
NEO – “the Ethereum of China”.
IOTA – very technologically advanced, huge potential, but has a lot of FUD spread about it and is currently not user-friendly at all (but a new user-friendly wallet is due very soon).
When you look at the top 20 on coinmarketcap, you’ll see a number of other platform coins like EOS and Cardano. But these cryptos don’t have a working product yet. They are just a white paper with a lot of money behind them.
The four I list above are all working and have been out for a number of years.
Of these four, Ethereum is by far the safest bet. It already processes more transactions than every other crypto combined. It has countless major companies working with it and has a number of working Dapps built on it.
When you see an initial coin offering (ICO) the chances are that crypto is built on the Ethereum platform.
I have included the others because they also can do what Ethereum does. Some can do certain things better than Ethereum, even. And some can – theoretically – do most things better than Ethereum.
But they don’t have anywhere near the network Ethereum already has, or anywhere near the amount of developers. And they aren’t as battle-tested.
And it’s the network effect that is driving crypto.
Basically, if Ethereum fails, it’s going to take the whole world of crypto with it. If it succeeds, it’s going to be the “tide that raises all boats”.
So I would recommend you make Ethereum your biggest holding, by far. Anywhere from 25% to 70% of your entire crypto portfolio.
Many people even go a full 90% into Ethereum.
But don’t just take my word for it.
The key here is to do your own research
Read the whitepapers – actually do it. Seriously.
Whitepapers are where the creators of the crypto lay out their plan. They explain – usually very simply – how it works and what it hopes to achieve.
This is the starting point of your research into any crypto you want to invest in. You can learn an awful lot from the crypto’s white paper.
Go on the crypto’s website
Have a look around the crypto’s website. Don’t get suckered in by a flashy website. Look for the section on the team and check their backgrounds. If they have a ? over their face or don’t give much background, steer clear.
Look for any partnerships they have and get a general feel for the crypto.
Take a look at the Reddit communities
Reddit is one of the best places to find information on any crypto. You have hundreds, if not thousands of people adding to the debate. If they post something useful they get an upvote. If it’s false or not useful it gets a downvote.
The upvoted posts and comments rise to the top. So it makes it easy to get good information fast.
The only thing with Reddit communities is that they will all shill their own coin, and mostly only post positive news about it.
So it’s also a good idea to search for posts about that coin on other cryptos Reddits so you can get a more balanced view.
A good general purpose Reddit for all cryptos is:
And EthTrader’s Reddit also, surprisingly, has fairly balanced opinions, mostly. It even has a daily “alt-coin” (any crypto that isn’t Ethereum) discussion.
With that in mind, here are the white papers, websites and Reddits of the four coins above.
It’s worth pointing out that a lot of people have recently lost their money due to fake wallet seed generators for IOTA wallets posted online. Right now, its wallet is very difficult to use and a lot of people end up losing their entire balance because of that. As you will see if you go on its Reddit.
So, if you decide to buy IOTA, for now, I’d suggest you leave it on the exchange. This goes against a fundamental rule of crypto, which is to not trust exchanges to store your cryptos. But for now, a big exchange like Binance is a safer bet than trying to work out how to use the wallet.
Once the official new wallet gets released, and is proven to be good, I will update this caveat.
But as we haven’t covered how to buy, exchange and store cryptos yet, this shouldn’t be an issue for you. The new wallet is due very soon, so maybe it’ll be out by the time we get to that.
A word about bitcoin
Bitcoin is obviously the biggest crypto out there right now.
It still has huge potential to go up, and is the gateway to getting into many other cryptos. By that I mean you need to buy bitcoin in order to trade it for other, smaller cryptos on exchanges. Many cryptos can now be traded against Ethereum, but some still require bitcoin.
I have decided to include it in this part of the guide along with the platform cryptos even though it’s primarily a currency just because of how big and important it is. Bitcoin moves all crypto markets.
Bitcoin is also getting an “upgrade” called Rootstock that will allow it to do smart contracts (like the platform coins) on a side chain. But time will tell how well this solution works as bitcoin was never designed with smart contracts in mind.
Still, most people recommend having bitcoin as your biggest holding. I don’t. Obviously bitcoin is currently the crypto king, and it will probably remain so for some time. But one of the other platform cryptos may well surpass it at some point. My bet is on Ethereum.
I would still recommend you have bitcoin as your second biggest holding, after Ethereum though.
Bitcoin has such a huge first-mover advantage and network effect it will be very hard for any crypto – better tech and applications or not – to overtake it.
And if you really want to start investing in cryptos the single best place to start is by reading the original bitcoin white paper here. It’s written in a very easy to follow way and sets out a lot of the basics common to most, if not all, cryptos.
Okay, that was a very long part one. I’ll try to keep part two (probably next Friday) under 2,000 words.
In part two we’ll cover currencies, utilities and possibly some hybrids.
Until next time,
Editor, Exponential Investor